Farm Horizons, August 2010

Farm management: an overview of common topics

By Linda Scherer
Staff Writer

Farming can certainly be unpredictable with fluctuating farm prices and being subject to the whims of Mother Nature. But farmers today are smarter than ever when it comes to knowing what works, what doesn’t, and, when in doubt, knowing where resources are available to get help.

In this area, one source to help farmers make informed decisions and take charge of their financial future is Myron Oftedahl, farm business management instructor through South Central College.

Currently, Oftedahl is working with 45 farm operations in his area, helping them to develop the financial reports they need for lenders. He also tries to help with goal setting and business planning depending on where the farmer is in his life.

His youngest farmer is 19 years old and purchasing farmland with his grandfather. His oldest farmer is 74 and preparing to turn his farm over to his son. Some of the farmers have just started the farm management program, and others have been in the program for more than 30 years.

For anyone thinking about a career in agriculture, or maybe even as a source of help to farmers who have already started an operation, Oftedahl offered some general farming tips in a recent interview.

Think spring when buying equipment

For those farmers just starting out, buy the equipment needed for farming before other necessities, Oftedahl suggests, concentrating on spring tillage. A good tractor is a priority and next, a planter.

“Don’t buy the cheapest planter you can find,” Oftedahl said. “Be willing to put money into the planter because you get one shot at putting it (seed) in the ground and you have to do it right the first time.”

For harvesting the crop, Oftedahl said the farmer should be working with between 400 and 500 acres before they can justify the ownership of a combine.

“There are enough guys out there that can be hired to come in and combine,” Oftedahl said.

For fall tillage, there is still some leeway to get the work done, not quite as tight as spring planting. Oftedahl suggests possibly getting a neighbor to come in and till the fields for the first few years.

Farmland  renting versus buying

Buying land is a good investment. “Eventually, as it is on your balance sheet, it is going to give you a better collateral base and be a better asset. The net worth of the operation will increase over time as the loan is paid off,” Oftedahl said.

However, Oftedahl suggests renting for those beginning to farm.

“To jump in and buy farmland right away is probably not the best idea,” according to Oftedahl. “I think someone starting out is almost going to have to rent because they are not going to have the equity to invest in land right away. It is really tough.”

“You will need a certain amount of cash just to put the crop in, but if you have all of your money tied up in just buying the land, there isn’t any cash to make the rest of the operation work,” he said.

Many operations in southern Minnesota rent more than two-thirds of their operation. According to statistics provided by Oftedahl, for southern Minnesota in 2009, out of a total of 688 crop acres per farm operation, 473 were rented.

Finding how much it costs to rent land in the area can be “tough to nail down,” according to Oftedahl. “They are not the most accurate numbers in the world.” Most numbers available are compiled through mail-in surveys, and not all farmers participate.

The rental estimates Oftedahl has access to are lower because they are looking at an average of over 1,200 farms, and some of those farms are renting land to a son, grandson, or another relative, who are getting a break on the land rent.

“The lowest one (land rent) I remember was $80 per acre, and the high end was $225,” he said.

“There are some landlords who just want to give those younger kids a chance to get started, so they will give them a break on the rent,” Oftedahl said. “Then, you have other people out there that are going to put it up for bids and they are going to try and get every dollar they can. They don’t care if it is the same renter as last year. The high end rents that I am hearing are $260 to $300 per acre in this area. The renter cannot justify it for the prices they are getting.”

For the farmers able to find land to rent, it is a definite advantage to get a contract for multiple years, according to Oftedahl. It is also a benefit for the landowner who is renting to have a multiple-year contract, because the renter is usually willing to spend more money on fertilizers and herbicides if he knows he will be farming the same land again the following year.

That way, the farmland is at least maintaining the levels of phosphorous and potassium it had when the renter started using the land. It keeps the weed population down, and the property will remain valuable crop land when the rental agreement ends, Oftedahl said.

One type of land rental becoming more popular, according to Oftedahl, is flexible rental agreements, which are advantageous to both the landlord and the renter.

Flex agreements were not used much before 2008 because they were complicated by a government payment through the Farm Service Agency (FSA) program. But recently, those payments have been simplified and Oftedahl thinks more flex agreements will be used in the future.

Typically, those with flexible rents set a lower fixed rent with an agreement that the landowner will receive more revenue if the renter has a good year.

“It is kind of like the old share agreements, where they did them half-and-half, or for 40/60, or whatever they agreed to,” Oftedahl said.

“The ones (flex agreements) that I have looked at usually set a moderate level and say, ‘this is the lowest amount I will pay you for rent,’” Oftedahl said. “For the upper end, it might be, ‘if the yields are over 150 bushels per acre for corn, I will pay you an extra $1 a bushel.’ It all depends on how complicated or formal the two parties want the contract to be.”

An example Oftedahl gave of how simple a contract could be is having the landlord guaranteed $120 per acre and receiving $1 a bushel for the average bushel of corn per acre, up to 180 bushels. For a not so good year, the landowner would receive $120 and, for a good year, he could receive as much as $180 per acre.

For those first-time farmers who are considering buying land, Oftedahl estimates most farmland in this area is between $4,500 and $5,000 per acre. To start an 80-acre farm, the buyer could be looking at around $400,000 for an initial investment.

Programs like FSA offer loans for beginning farmers at a lower interest rate  about 2.5 to 3 percent, instead of 6 percent. At 3 percent, Oftedahl estimates an 80-acre farm would be $12,000 in interest a year.

“Most lenders will limit the loan to about $2,500 per acre, so the buyer would have to come up with the other half,” Oftedahl said.

Other funding could come from the Rural Finance Authority (RFA), which is funded through the Department of Agriculture. The RFA has some stipulations based on the number of acres the buyer owns and his net worth. The loan amount is also limited to around $200,000 at 4 to 5 percent. It depends on where the interest rates are at the time.

“Through the FSA, RFA and a lender,” Oftedahl said, “we can usually find financing if that is the way they want to go.”

For someone who buys farmland with the idea of renting it out to pay back the loan, Oftedahl said they won’t make enough in rent to make the payments, and a portion will have to be subsidized. It all depends upon how comfortable the landowner is on how much extra money he will have to come up with.

Choosing what crop to plant

To decide what crop to plant, the farmer will probably look at which crop will bring him the most money, Oftedahl said. But he also has to consider the amount of time, machinery, and storage.

“When you are dealing with corn, you are probably dealing with four times the number of bushels as soybeans,” Oftedahl said. “We are looking at 50 bushels of soybeans versus 200 bushels of corn. So if you harvest corn, you have that much more product to handle and it is a slower harvest, plus a lot more bushels to store or haul to town.

Although Oftedahl did not know the reason, of the 48 continental states, Minnesota has the largest amount of on-farm storage of any of the other states in the US.

In Iowa, Indiana, and Illinois, the big states in the corn belt, it all goes to town. There is very little on-farm storage.

Until about six years ago, crop rotation had been a major factor in farmers deciding which crops to plant. It was believed that the rotation of the crops resolved some of the insect issues, mainly the corn root worm, Oftedahl said.

By rotating the crops, it was hoped the root worm would starve off when it hatched, since the farmer had planted soybeans the following year and the root worm would not have anything to eat.

Because of diapause, which is defined as a sleep time done by insects, it has since been discovered the root worm lays its eggs in the corn and those eggs can hatch two and sometimes three years later, according to Oftedahl.

Today, the farmer uses insecticides or genetics to solve the problem, which has driven the costs up more per acre to control the root worm, Oftedahl said.

Another interesting topic just briefly touched on by Oftedahl is the population of the Asian beetle. The beetle is used to control the aphids in soybeans. It does its job, but likes to reside in the homes of those living close to the soybean fields.

“Mother Nature throws us some curve balls once in awhile and it’s hard to know what to do with them,” Oftedahl said.

Crop insurance is required by most lenders

“Most lenders who are doing an operating loan of any type are going to require crop insurance, unless you are pretty well-established,” Oftedahl said.

Crop insurance can be purchased at any level up to 85 percent of the yield. Separate hail insurance can also be purchased. The hail insurance is a lot cheaper than revenue policies, according to Oftedahl.

Insurance is purchased on what crops will be valued at when sold and based on historic yields. If there isn’t any history of farming, then it’s based on the county averages, and the yield base would not typically be as good.

The most common insurance right now is a revenue policy which depends on the yield. The example Oftedahl gave was if the normal revenue on corn was $600 per acre and the coverage purchased was 60 percent, the insurance would guarantee you $360 worth of revenue. Anything less, and the insurance would step in and pay up to that $360 amount.

Oftedahl calls farming his ‘therapy’

Oftedahl enjoys farming his own land and calls himself a farm boy. He grew up on a farm in Eagle Bend and later attended the University of Minnesota at St. Paul to get his degree in agriculture. Following college, he taught high school agricultural classes for three years in Belgrade, MN. He then moved to Lester Prairie, where he spent 22 years working at the fertilizer plant there.

In January 2006, he decided to go back to teaching agriculture, joining the South Central College program as an instructor. There are colleges in six regions in the state that offer the management program with a total of 74 full-time instructors statewide.

The most important part of the program, according to Oftedahl, is helping the farmer start up an accurate bookkeeping system.

Originally, the program was through high school and there was an adult agriculture program and a vet’s agriculture program. In 1995, it moved to the secondary colleges.

“For those just getting started, I would really urge them to get in this type of program. We can help them through it,” Oftedahl said. “They will have a bookkeeping system in place, a balance sheet, cash flow, and they can walk in to a lender with the numbers to support what they want to do.”